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Many people are refinancing their home loans in order to get a lower interest rate or to consolidate their debts into one easy payment. However, there are some misconceptions about refinancing that we would like to clear up. In this article, we will discuss three of the most common misconceptions about refinancing in Australia.
Myth #1: you need to have a perfect credit score to refinance
This is simply not true! While a good credit score will give you more loan options and potentially a lower interest rate, there are still plenty of options available for those with less-than-perfect credit. The best thing to do is talk to a mortgage broker who can help you find the right loan for your circumstances. In serious cases, you can work with a mortgage broker or financial planner to make sure you get your credit score back to a positive level before you initiate your refinancing plans.
If you’re worried about your credit score, here’s our simple guide on how to clear a bad credit score.
Myth #2: refinancing will always save you money
Again, this is not necessarily the case. While it’s true that in many cases refinancing can save you money, there are also a number of fees and charges associated with taking out a new loan. These can include application fees, valuation fees, and break costs if you switch from a fixed rate to a variable rate loan. This is why it’s so important to speak to a mortgage broker beforehand, as they’ll be able to help you calculate whether or not refinancing is actually going to save you money in the long run.
You should also remember that if you’re refinancing to save on your monthly repayments, it may end up costing you more over the life of the loan.
Let’s look at a typical example that highlights both the potential benefits and shortcomings of refinancing where someone has an existing loan of $450,000 with 23 years remaining on the loan.
Grace took out a 30 year mortgage. Her current mortgage is $450,000 at a rate of 5.50% with 23 years to run.
Her current minimum monthly repayment is $2,876.79
Based on the term remaining, her interest rate and repayments, the total interest bill for the loan (assuming all else remains equal) is $343,995.27.
Let’s assume this person is able to refinance to a loan with a rate of 4.75%, and it is set up over a new 30 year term.
Grace’s minimum monthly repayment drops considerably to: $2,347.41.
This will save Grace $529.38 in her monthly repayments.
However, given the longer loan term, the total interest bill increases to: $395,068.69.
The reduction in monthly repayments may offer someone short term relief, but the objective should be to maintain the previous monthly repayments or even more to reduce the overall term and interest bill.
If we assume the refinance takes place and the previous repayments are maintained, the remaining loan term reduces from 23 year to 20 years and 3 months with the total interest bill reducing to $253,031.05
If Grace takes an active interest in managing her mortgage, she could save upwards of $140,000 over the life of the loan.
This scenario shows exactly why it pays to work with a mortgage broker, as an experienced broker can analyse your current circumstances to determine the best course of action for you. You may not need to reduce your minimum monthly repayments, in which case, refinancing could save you considerably in the long run. Or, you may need some immediate repayment relief, and the longer term repayments may be what you need for now.
Myth #3: you have to refinance with your current lender
This is definitely not the case! While your current lender may offer you some attractive deals to stay with them, it’s still worth shopping around and comparing rates from different lenders.
Again, a mortgage broker can turn to their entire panel of lenders to shop around for the most competitive interest rate. If you approach your lender, they can only offer you loan products within their suite of offerings, and they may not be able to offer the lowest rate in the market that is or the most suitable loan option for you.
Myth #4: It’s too much hassle
The process of refinancing doesn’t have to be complicated or time-consuming – especially if you use the services of a mortgage broker. Bryce Quirk, our branch principal and mortgage broker at YBR Noosa Heads, recently stated that:
“One of the more common misconceptions out there about refinancing is how difficult it is. It’s actually not that difficult. Particularly when you work with a mortgage broker, as we collectively manage the process for our clients, so we do the bulk of the heavy lifting.”
“Yes, as a customer you will have to gather some documentation, but once that document gathering process is done, it’s pretty straightforward for our customers.”
“As long as you understand the timeline around refinancing, that is, usually a three to four week period to finalise the deal, then you can rest comfortably knowing that your broker is doing the work for you.”
“With turnaround times at the moment being quite efficient, particularly when we compare turnaround times to previous years (where they deteriorated significantly), customers who are keen to refinance, and they engage myself or an efficient mortgage broker, they will be putting their best foot forward.”
A good broker will take care of all the paperwork and legwork for you, so all you need to do is sit back and wait for your new loan to be approved.
We hope this has cleared up some of the misconceptions around refinancing. If you’re considering refinancing your home loan, be sure to speak to one of our trusted mortgage brokers who can help you through the process.
